<p style="text-align: justify">In order to clarify those in the market miunderstand the&nbsp;national corporate income tax policy&nbsp;about partnership, the fellow of State Administration of Taxation Science Research , group leader&nbsp;of The&nbsp;State Administration of Taxation on key topics - &quot;Partnership Enterprise Income Tax System Research&quot;&nbsp;Mr.&nbsp;Weizhi Mei , in the &quot;Investment and Cooperation&quot; magazine published&nbsp;in June number,&nbsp;an article&nbsp;titled &nbsp;&quot;Partner Countries to Understand Tax Policy&quot;.&nbsp;&nbsp; This paper detailed about the view of the state&nbsp;regarding the partnership enterprise's income tax policies&nbsp;as well as its&nbsp;background and meaning, and it helps professionals to understand the PE national policy, its main points are selected and excerpts as follows :-</p> <p style="text-align: justify"><br /> <strong>First, the partnership has no tax liability?&nbsp;Is it that it&nbsp;needs to pay taxes&nbsp;by the partners&nbsp;of the partnership ?</strong></p> <p style="text-align: justify"><strong><br /> </strong>In China, the market generally believes that , if it is a corporate enterprise,&nbsp;it must pay taxes ; if it is a partnership firm, it is not subject to tax.&nbsp; &nbsp;In fact , this is a fundamental misunderstanding about partnership of the tax system.<br /> The Country in 1997, promulgated the &quot;Partnership Enterprise Law&quot;, it clearly states that no longer a simple &quot;Partnership&quot; relationship, but it&nbsp;has a relatively independent quasi-property rights as legal entity.&nbsp;&nbsp; Thus, Document No. 91 which requires the partnership to take quasi-entity taxed mode.&nbsp;&nbsp; Which clearly states:&nbsp; Partnership with each partner shall be the taxpayer; the gross income of partnership enterprise shall be taxed yearly, less the costs, expenses and losses, the balance, as production of individual investor with&nbsp;operating income ; production and operating income including corporate income are allocated to individual investors and businesses for that year as retained earnings (profits).&nbsp;&nbsp; Thus, even if the partnership does not allocate the profit retained, the partner should also be taxed in order to avoid the partnership itself become a tax avoidance tool.</p> <p style="text-align: justify"><br /> In 2006 &quot;Partnership Enterprise Law&quot; amendment, the partnership can take this more limited partnership company related systems to learn new partnership.&nbsp;&nbsp; In accordance with the civil law of the country that belong to the practice of France and Germany, on the limited partnership that includes the company's &quot;limited liability&quot; mechanism of new partnership, it is reasonable to take its taxable entity model that will be treated directly as a taxpayer.&nbsp;&nbsp; However, the state tax department in the development of No. 159 , the quasi-entity while continuing for taking their tax mode, do not treat it as a taxpayer ; it is hard to prevent it from becoming tax avoidance tool, it must be reiterated as &quot;taxable as the resulting accounting subject&quot;, such a series of requirements.&nbsp;&nbsp;&nbsp; No. 159 clarifies:&nbsp; Production and operation of partnership income and other incomes take &quot;the first minutes after tax&quot; principle , the specific amount of taxable income calculated in accordance with No. 91, the relevant regulations and the term &quot;Production and operation income and other income.&quot;&nbsp; Both assigned to all partnership income partners, also included the year's retained earnings (profits).&nbsp;&nbsp; Also it is clear that, partners are legal persons and other organizations&nbsp;when calculating its corporate income tax and it shall not use the partnership losses against their profits.</p> <p style="text-align: justify"><br /> Since the country is taking the partnership as taxable entity quasi-mode&nbsp;that its nature should be understood as &quot;a partnership, though not as a taxpayer, but&nbsp;it must first links&nbsp;to the partnership taxable income&nbsp;when calculation, then the share of a partner who is taxable for share of income tax .&quot;&nbsp;&nbsp; However, in general that &quot;the partnership has no tax&quot; such misunderstanding , many market institutions claims to be an investor:&nbsp;&nbsp; Investing in partnership funds&nbsp;is not only to be funded as part of no tax;&nbsp;&nbsp; Funds will be distributed to income to investors, investors can use a variety of book loss to offset gains, so there is no need to pay tax on the part of investors.</p> <p style="text-align: justify"><strong>Second, how to&nbsp;interpret the partnership's principle&nbsp;&quot;division&nbsp;before&nbsp;tax&quot;&nbsp; ?</strong></p> <p style="text-align: justify"><strong><br /> </strong>As mentioned above, in accordance with the quasi-entity tax model, partnership, while it is not a taxable entity but must be accounted for taxable income subject to&nbsp;the accounting of taxable income, it will be on &quot; tax base&quot; that is assigned to the partnerand then paid by the partners for their tax.&nbsp;&nbsp; Document No. 159 clearly states&nbsp;that production and operation of the partnership income and other income take &quot;division before tax&quot; principle ; it means production, operation and other incomes , including the partnership that allocated to all partners of their incomes and retained earnings from the enterprise of the year (profit) that it accesses to productive partnerships operating income and other income , whether or not it has assigned to a partner,&nbsp;the partner should be responsible for the income tax .</p> <p style="text-align: justify"><br /> Therefore, our current partnership &quot;division before&nbsp;tax&quot;, the main points here are not the &quot;income&quot;, but &quot;the tax base'.&nbsp; &nbsp;In accordance with&nbsp;the &quot;tax base&quot; principle, as long as the partnership areas have taxable income, it must be a partner in a partnership that is taxed.&nbsp;&nbsp; Otherwise, if the partnership have an annual income that retained in the partnership, it&nbsp;does not allocate part of it, the state cannot receive the total tax.<br /> &nbsp;</p> <p style="text-align: justify">However, quite a few people based on the understanding of &quot;partnership without taxation&quot;, assuming that the state undergo the principle of partnership's &quot;division before&nbsp;tax&quot;, it should be &quot;partner distributed&nbsp;for profits and then they need to&nbsp;pay the partners tax&quot;.&nbsp;&nbsp; &quot;Many places and even the introduction of a special tax department, only when the partnership actually allocated to the partners in cash and after deducting the costs and losses with surplus,&nbsp;then they&nbsp;need by the partners to pay tax.&nbsp;&nbsp; According to this tax policy, as long as the annual partnership income retained in the partnership, partners have possible tax avoidance .</p> <p style="text-align: justify"><strong>Third, how to understand the natural&nbsp;person as&nbsp;partner&nbsp;on payment of &quot;individual industrial and commercial households&quot; tax ?</strong></p> <p style="text-align: justify"><strong><br /> </strong>In accordance with&nbsp;Document No.&nbsp;159, all kinds of partnership on &quot;taxable income &quot; should be calculated in accordance with the 2000, No. 91 that executed in accordance with No. 91 of the calculated taxable income of natural person as partner, whether it is a general partner or a limited partner, it shall mutatis mutandis &quot;Personal Income Tax Law&quot; which stipulates that &quot;Individual Industrial and Commercial Households Operating Income&quot;&nbsp; for 5% -35%&nbsp;at such&nbsp;progressive rates.</p> <p style="text-align: justify"><br /> Our country does not levy a separate &quot;capital gains tax&quot;, to engage in equity investment and other capital gains obtained, it must follow the Personal Income Tax Law from ordinary income and&nbsp;comprehensive tax.&nbsp; &nbsp;In accordance with the &quot;Personal Income Tax Law,&quot; the individual types of incomes&nbsp;are two basic rates mainly:-<br /> &nbsp;</p> <p style="text-align: justify">(1) The &quot;Wage Income&quot;:-&nbsp;&nbsp; &nbsp;Because it is on a regular income bases and with greater relevance of personal wealth , taxes are needed to be considered&nbsp;as on income re-regulation and therefore adopt a comprehensive tax model , after deducting the basic living expenses RMB&nbsp;42,000 / year , it applies&nbsp;a progressive tax rate of 3% -45 %.<br /> &nbsp;</p> <p style="text-align: justify">( 2 ) On the royalties, labor, dividends, bonuses , transfer of property, incidental income and other income ,&nbsp;as it&nbsp;is occasionally, individuals that engaged in such activities is difficult to deduct various costs , losses, and is difficult to consider the cost of living for individuals and families, and it had to have an income to get their first tax, the tax base is relatively high , the rate is naturally low.&nbsp;&nbsp; Because these occasional income&nbsp;and similar incidental income and personal wealth are not necessarily related , such as taking classified tax , tax on income is difficult to consider the re-tune the&nbsp;section effect, so it applies a single proportional tax rate of 20%.<br /> &nbsp;</p> <p style="text-align: justify">In addition to these two basic tax rate on individual industrial and commercial households, it is particularly, for&nbsp;&quot;personal&quot;, because of itself is relatively independent industry and commerce that have been the subject can be the &quot;total income for each tax year less costs, expenses and losses&quot; the balance of &quot;comprehensive tax , therefore, from the principle of tax law concerned, it is a comprehensive reference to a foreign tax mode that directly applicable on wages income or progressive rates.&nbsp; &nbsp;However, to encourage the re-employment of laid-off workers perspective, our country&nbsp;on the &quot;individual businesses operating income&quot; , a new preferential tax rates on relatively low excess progressive tax rate, the specific rate of 5-35 % applies.</p> <p style="text-align: justify"><br /> For the subsequent emergence of partnership, the state tax department in the development of 2000, Document&nbsp;No. 91, they take&nbsp;the &quot;Individual Industrial and Commercial Households Operating Income&quot; approach, it applies 5-35% on the progressive rates.&nbsp; &nbsp;This is a kind of preferential policies.&nbsp;&nbsp; Because, as a business partnership&nbsp;and an individual industrial and commercial households, compared to enjoy more legal protection and administrative services on the grounds that bear the &quot;Individual Industrial and Commercial Households&quot; such &quot;quasi- personal&quot; Mode for&nbsp;taxpayer.</p> <p style="text-align: justify"><br /> In particular to the 2006 &quot;Partnership Enterprise Law&quot; amendment, after&nbsp;its release, a partnership can in accordance with the &quot;limited partnership&quot; form for&nbsp;establishment.&nbsp;&nbsp; If you follow our country&nbsp;the civil case&nbsp;for consideration, on&nbsp;&quot;limited partnership&quot; that draws more companies that based on corporate governance mechanisms&nbsp;for the new partnership, the civil law&nbsp;are similar to&nbsp;France and other European countries,&nbsp;that use a tax of main direct income tax approah.&nbsp; &nbsp; However, in the development of&nbsp;the national tax department No. 159 , it is still&nbsp;require &quot;Individual Industrial and Commercial Households&quot; such &quot;quasi-individual&quot; to pay taxes.&nbsp; &nbsp;Thus, the limited partnership equity investment enterprises need both the common law countries such as directly to the unified accounting&nbsp;for its taxable income to the individual's comprehensive income, where high progressive rates apply , or apply a higher capital gains tax rate ; also no other European civil law countries such as France, in accordance with the &quot;substance over form&quot; principle, mutatis mutandis, in the corporate sector equity investment company system as the main tax equity investment firm.<br /> &nbsp;</p> <p style="text-align: justify">Since various types of partnerships substantially discounted&nbsp;the &quot;Individual Industrial and Commercial Households&quot; such &quot;quasi-individual&quot; comprehensive tax, the tax base is calculated based on a completely different person who directly engaged in equity investment that made in accordance with the &quot;occasional income&quot; on tax base for calculating &quot;transfer of property income &quot; and therefore, the applicable tax rate should not be simply applied naturally !<br /> &nbsp;</p> <p style="text-align: justify">When individuals directly engaged in equity investment activities, the obtained &quot;transfer of property income&quot; are similar to the &quot;occasional income&quot;, it&nbsp;can only be accounted for separately per-view rather than using other transfer of property to offset losses caused.&nbsp; &nbsp;Although you can&nbsp;use the &quot;transfer of property income and deducting the original value of property reasonable expenses, the balance&quot; as tax base, but it can be less than the &quot;reasonable costs&quot; that is limited to the extra investment directly related to transaction fees and he likes&nbsp;to determine the cost accurately.&nbsp;&nbsp; Because the tax is higher, naturally it can be applied relatively low single percentage rate ( specifically, 20% ).<br /> &nbsp;</p> <p style="text-align: justify">Individuals through limited partnerships can indirectly engage in equity investment,&nbsp;or partnership 's taxable income , you can&nbsp;use the annual final settlement,&nbsp;when computing taxable income for deduction where three(3) categories:-</p> <p style="text-align: justify">&nbsp;</p> <ul> <li>(1)&nbsp;&nbsp; Within 5 years&nbsp;for deducting any sum of investment losses ;</li> <li>(2)&nbsp;&nbsp; Net of various types of partnership management expenses ( including but not&nbsp;limited to those engage in investment activities of&nbsp;transaction costs , but also the amount is far&nbsp;much&nbsp;larger than the former types of pay management fees to the governing bodies and performance fees ) ;</li> <li>(3)&nbsp;&nbsp; Individual investors net basic living expenses ( according to Cai Shui [ 2011 ] No. 62 , it is currently the standard for deduction of RMB&nbsp;42,000 / year ).</li> </ul> <p>&nbsp;</p> <p style="text-align: justify">After deducting the above three(3) categories , individuals can indirectly through limited partnership that engaged in equity investment for taxable income significantly reduction, if the tax rate is still applicable to individuals, then it&nbsp;directly engage in equity investment that acquired &quot;transfer of property income&quot; , it will inevitably cause significant unfair tax burden under this situation: the individuals through equity investments in limited partnerships that engaged in the country can&nbsp;enjoy more legal protection and administrative services, but it was significantly lower than the actual tax burden for individual who directly engage in equity investment !</p> <p style="text-align: justify"><strong>Fourth, how to&nbsp;handle the local PE fund for partnership tax as under incentive policy&nbsp;?</strong></p> <p style="text-align: justify"><strong><br /> </strong>Under the international general practice , the state usually&nbsp;treats those venture capital funds which&nbsp;in the area of market failure to give appropriate policy support,&nbsp;for the general equity funds, because the market is already fully filled, it no longer to give policy support, but through proper supervision, to prevent thess risks.&nbsp;&nbsp; However, in recent years, many local governments&nbsp;regards domestic equity funds as a mean of investment, the introduction of competing types policies.&nbsp;&nbsp; Numerous types of policies, policy efforts is growing.&nbsp;&nbsp;&nbsp; Among them, many are ultra vires tax breaks.&nbsp; &nbsp;For example, in accordance with Document No. 159, all kinds of partnership with &quot; taxable income&quot; base as calculated, it should be in accordance with the 2000 Document No. 91 for execution ; No. 91, in accordance with the calculated taxable income, whether it is a natural partner of the general partner, or a limited partners, it shall mutatis mutandis &quot;Individual Industrial and Commercial Households Operating Income&quot;&nbsp;with 5% -35% of progressive rates.&nbsp;&nbsp; However , local governments generally charge natural partner with ultra vires tax that would be reduced to 20% in accordance with the provisions of national tax policy, &quot;refund &quot; is a disguised tax relief , but many local governments share of 40% ( total 8 points ) and then return to the investors.&nbsp;&nbsp; As for partnership funds for dividends income, in accordance with&nbsp;Document No.&nbsp;159 , it shall be unified as &quot; other income &quot; into the taxable income taxed , but many local governments to be ultra vires free . Partnership fund for sales tax , in accordance with national sales tax regulations , partnership business tax remains as the main tax . But many local governments mistaken , since no partnership income tax as the main body , it is also no sales tax as the main tax , the sales tax also gave a free. While in January 2009 , the State Council for approval , the state tax departments jointly issued the &quot; resolutely put an ultra vires tax breaks , to strengthen the work of administering the tax notice&quot; ( Cai Shui [ 2009 ] No. 1 ) , but the local government tax incentives contest has intensified !</p> <p style="text-align: justify"><br /> Development of equity investment funds to create the necessary policy environment is necessary. However, if the tax rate is too low affects social justice, such a policy is difficult for a long time . In the United States , had served in the &quot; capital gains tax&quot; directly into the personal income tax, for a very high progressive rates . 2001 dotcom bubble burst, to revive the economy , Bush proposed tax cuts . In accordance with the tax cut bill , the general capital gains tax still applies to personal tax rates applicable to ordinary income , up to 35% , but the investment period of more than one year for the highest capital gains tax rate of 15% . The policy to encourage long-term investment has played a certain role, but also caused much criticism . 2007 outbreak of the &quot; partnership Blackstone Group avoidance storm&quot; and in recent years, continued spread of the &quot; Occupy Wall Street &quot; , in much the capital gains tax rate is too low correlation . Therefore , the U.S. government and are hot to the applicable capital gains tax rate back to its original level of up to 35% .</p> <p style="text-align: justify"><br /> In recent years , China's equity investment fund development practice has shown that : the local government partnership PE fund for tax incentives , not only undermines the dignity and authority of the national tax , is not conducive to social harmony and equity investments in the development of the industry's own sound . The recent period , there have been public opinion, individual industrial and commercial households engaged in small business in the real economy to pay 5-35 % of the progressive tax ; very wealthy individuals through a limited partnership engaged in equity investment and enjoy the country more legal protection and administrative services , but in fact simply follow the proportion of single tax rate of 12% ! On this basis , also have access to numerous other local government tax deals . Some of the best people in the industry and has a conscience , also known as , the numerous local tax incentives , not only contributed to the &quot;PE bubble&quot; , forming a &quot; national PE&quot; phenomenon, resulting in vicious competition in the industry , but also for some unscrupulous elements local tax incentives lure investors and create the conditions for illegal fund-raising . Therefore , to maintain the national tax unity, promote social harmony and sound development of the industry's own equity investment point of view , there is the need for the introduction of various types of local government tax breaks to be ultra vires rectification .<br /> &nbsp;</p>